The European Central Bank (ECB) voted to hold the benchmark deposit rate at 2%. Thursday’s decision marks a change from the eight consecutive rate cuts that started in June last year. It signals that the Governing Council has entered wait-and-see mode until the tariff outlook is clearer. We expect the ECB to cut once more in 2025, leaving the deposit rate at 1.75%. If US tariffs target pharmaceuticals, or are higher than we expect, then there’s a chance the ECB accelerates the pace of cuts.


Further decisions rest on tariff and trade talks

The ECB’s decision to hold the deposit rate at 2% was not a surprise. 

While the ECB’s policy statement was notably short and didn’t give much away about how its views are developing, the Governing Council did emphasise that inflation across the euro area looks set to remain at the 2% target as “domestic price pressures have continued to ease, with wages growing more slowly”. This confirms our analysis that the ECB has essentially declared victory over inflation.

The ECB also highlighted that the economy has so far proved resilient to tariff headwinds. That said, the Governing Council is keeping the door open to further easing as “the environment remains exceptionally uncertain, especially because of trade disputes”. We’d already expected one further cut this year, but once a clearer picture of US tariffs forms, more may be necessary. This would cushion the impact of larger-than-expected tariff rates or sector-specific levies on pharmaceuticals. 

Nevertheless, our base case remains for one more cut this year as the disinflationary effect of a stronger euro and slowing pay growth allow the ECB to shift its focus towards US tariffs. 

 

Lagarde pushed back against cuts, but one more still likely

The ECB’s most recent forecast outlined a few scenarios. This included the 10% baseline and sector-specific tariffs on cars and steel remaining in place. Another, “severe”, scenario assumed the original 2 April tariffs were reintroduced globally. This picture is clearly too pessimistic. Yet the baseline could also be too optimistic. An alternative, and more likely, situation is that the main EU tariff rate will land at around 15% with the possibility of some pharmaceutical tariffs. This outcome could prompt the ECB to cut interest rates more aggressively. 

However, President Lagarde struck a less dovish tone in her press conference than the markets expected. She described rates as “on hold” and the ECB being in a “wait and watch” situation instead of hinting at more cuts. In response, financial analysts trimmed the likelihood of a rate cut in September to just 26%, down from 42% the day before the decision to hold was announced (see chart).

Additionally, President Lagarde emphasised that there is a chance trade tensions could be inflationary if disruption leads to bottlenecks in global supply chains and goods rerouting. EU retaliation would also be an upside inflation risk. Both highlight the uncertainty the ECB is grappling with and suggest another rate cut is not necessarily guaranteed. 

 

The implications for Ireland

Turning to Ireland, CPI inflation rose to 1.8% in June. However, we expect inflation to head back over 2% in the autumn. Food inflation is running at 4.6%, its highest level since January 2024, and energy inflation, while negative, is at its strongest level since 2023. These items are particularly salient to households’ perception of inflation and could prompt employees to bargain for bigger pay rises to protect their real incomes. 

On the growth side, the Central Statistics Office (CSO) revised GDP growth down to 7.4% from 9.7% in Q1, but raised its estimate of Modified Domestic Demand (MDD) growth to 2% from 0.8%. This suggests a slightly healthier balance of growth amid the noise of tariff front-running. However, a hotter domestic economy could present an upside risk to inflation.  

All in all, Ireland’s economy remains far stronger than the rest of eurozone, but Ireland remains far more exposed to US tariffs. Sector-specific tariffs here would slow growth and dampen the upside risks to inflation. This would mean the ECB could continue to cut the deposit rate without stoking higher inflation in Ireland, helping to offset the hit to growth. 

Ultimately, we expect the ECB to cut interest rates once more in 2025, leaving the deposit rate at 1.75%. Any further cuts will depend on how damaging the final US tariff rate looks to be and whether pharmaceuticals fall into their scope, which would be particularly damaging for Ireland’s economy and the eurozone as a whole.

 

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